tv Options Action CNBC February 2, 2014 6:00am-6:31am EST
things. now you stay safe. bye-bye. melt down. the next asian currency crisis. >> you must investigate this. >> we will, and you will be shocked on what it could mean for u.s. stocks. >> plus, tired of losing money? we'll tell you the surprising sector where traders are finding fast profits now. >> that's how we roll in our house now, baby. >> wow, winning. >> after a huge earnings we'll tell you why it's time to cash your chips on wynn resorts beginning right now. game on. live from the nasdaq market in
new york's super bowl obsessed. i'm melissa lee. these are the traders on the desk. we'll begin with a market mystery. the world worries about a market slow down. high growth names are on fire. check out google hitting a new all-time high today. take a look at chipotle. it sells burritos. facebook also up and now worth more than disney. if the market is so worried about a meltdown, why are investors so willing to pay so much to own these kinds of names? etc. will' get in the money now and dan this is a curious price market. >> it seems like the crowding of these names, all three of those names, wynn, google, chipotle all made new all-time highs, all traded high valuations other than google, let's just say. but to me, i think you really have to focus on some of the stuff that's not working. look at the bowing, johnnion.
the fact that the stocks on the front are going bananas. >> when i take a look at this, take a look at what chipotle's multiples are, the next 12-month earnings, that's with 30% revenue growth which is obviously a good number. the question is does that stack up? does that growth actually stack up to that multiple. i don't think it does especially if you see a market getting skittish. that's what i would be doing. >> when names like chevron and exxon mobil aren't working, then you have to look for names that have a story. what are story stocks right now? twitter and it's wynn. wynn, we know what the story is. we've talked about it. it's macaw.
i think what's interesting is people are trying to buy call because they want to participate to the up side. both of those names, twitter and wynn sought more than twice as many calls as puts straight today. >> maybe we're making too much about how concerned investors are. gold had the first weekly loss in a long time. the market is as bad as it felt day to day, the markets fell flat. >> the fair point is the market isn't off of highs. it's not like we see indications of absolute chaos. the valuation is above its 50-year average for the s&p trading 16.4 times earnings. it isn't as if everybody is getting that. >> i think it's also fair to say coming into 2014 there was a massive level of complacency. risk assets were not priced for volatility. when we're having volatility, when you said the s&p closed flat, the vix didn't. you're seeing a lot of single stock volatility. people are shooting first, asking questions later. we saw numerous examples of down
10% moves on earnings disappointments. i think you can count on one hand, i think we did, wynn, chipotle, facebook, google, that out performed. to me, that's a concentrated trade. we're going to talk about twitter here. i think looking into next week's earnings, i think there's some stuff to do in the options market that make sense. >> i think concentrated is dangerous. i think you're right. the vix, about 18, that's not particularly expensive. >> all right, sam. let's talk about twitter. >> the options market is implying about a 16% move. this is their first quarter since they were a publicly traded company. there is no historical reference for how it's going to be traded. that being said, we have facebook. it's moved about 12%. implied volatility is really high in twitter partially because the industry doesn't know what to make of it. when we think about this company, we'll get a sense for really what sort of growth is going to be on the table for quarters to come, that's one of the reasons why implied vol will
be high until we get there next week. that means it will remain high until that quarter. >> let's talk about trade. you were using a call spread risk reversal. it's a little bit tricky. bullish strategy to sell a put. use that money to buy a call spread. you want the stock to go to the high side of the call. that's where your profits are capped and since you're also short a put, you've got to be willing to buy that stock. so what about the trade? >> facebook was up 14% yesterday after really better than expected results. i got this question a dozen times. how do i play twitter? i think twitter is going to do the same thing. if you're going to run out and buy twitter at $65. i think the best trade is sell more options than to buy. when the stock was $65. you can do something called a call spread risk reversal. sell the march 55 put. you can use the proceeds to actually buy the march 65 at the money, 75 call spread. that whole package would cost
you $50. between $65 and $75 on march expiration you can make up to $9.50. you do not start to lose money in a meaningful way other than that 50 cent premium until $55 on march expiration. i think that risk/reward sets up great if you want to be long twitter. >> it's interesting that you talk about facebook and the first quarter and a good look at it. we did a study on all the ipos in 1998 when we were trying to figure out what facebook options would do. twitter is a textbook case. basically trading close to a high in terms of the price of options. what happens, the first quarter rolls out, implied volatility, the price drops significantly. what's important is you can actually make money right after earnings even if the stock stood here because of the vol suck that scott likes to refer to. this is one of the situations do i like twitter valuations? not particularly bu want to sel
than you buy. the interesting thing is you could buy the stock at 65 bucks, but you don't want to do that. you're going to wait and buy it at a 12% discount and because you're long at 65 call, you participate immediately if it goes up. >> march expiration, that happens before the biggest lock up expiration on twitter. >> that's s a great point. this is a trade that you want to be on it quickly. if this thing moves up to the high strike, you want to be out. i would put this name in one of those categories where it's bifurcated from the market. who cares about valuation. let's get more news on it. >> don't be long on the float increases. let's wrap this up. stocks versus options. want to buy twitter stocks, that will set you back 65 bucks a share. he could be forced to buy twitter for $55 a share. that is a 15% discount from where it closed today. let's move on here to what could be the surprise trade of 2014. that is biotech. as a sector it is up almost 9%
this year on its own. that is way better than tech. can the streak continue? let's call to the charts and find out with carter braxton worth who is pulling a double duty. he was on "fast" earlier and what do you see for biotech, carter? >> this is a strong part of the market. is it too much of a good thing. here is a chart over the last two years. what's important about up trends is that when you get a little too far above trend you have pull backs. let's switch to red. caller. you get a pull back, you get a pull back. you get a pull back. by all accounts we're due for that. this is the ibb, the etf. it implies a 10% move to the down side. let's put this in context. here is the long-term chart. this starts to be a little bit insane. this base, it's a beautiful one, you can't debate it. the breakout, the ibb, this is the actual index itself, the nbi, they're both the same, is up four fold from 600 to 2400,
2500. let me show you two more charts just to put this in context. here is the same chart with a one-year moving average. this is as far above the index has ever been except for one other time, 1999/2000. we know how badly that ended. then one other thing, a comparative chart. same chart as this but i'm going to bring in two other important things, the s&p, the nasdaq itself and then of course what we're talking about, biotech. how much more before one can say too much? we would say you've reached that point now. >> all right. too much. what do you say? >> well, one of the things you need to ask yourself is what is propelling it so much higher? is it because revenues and earnings have grown a whole lot or is it simply because of multiple expansion. what's going on here over the past year, this is up 70%. fully half of that comes from multiple expansion. of the top 35 names in the ibb index, 27% don't make any money at all. the remainder are trading 43
times earnings. a lot of them are more mature. we're talking about names biogen, gilae a d, amgen. what you're looking at is a lot of optimism that has crept into the space because of a lot of notable stories. people want to be long on that call action. i am absolutely with carter. this thing is extended. >> what are you doing to protect yourself. >> because this is an index, you don't have to pay as much. i'm going to go out and buy specifically the june 240 puts. you'll pay $15 for those. i think this goes lower. >> is that an expensive put? >> it is. implied volatility in this name is close to the 52-week high. i would ask if i were at home, i would ask why not do a spread. mike explains why. he wants to spread out of it. that said, we like to do that. in this situation there's not a whole lot of room for error. if this doesn't work out, you're not going to get a chance to spread out profit. >> a good thing about doing a spread, that is something you
consider, sell 2920s, the 200s against it, betting against that, use limit orders. the spreads on these options are a little bit wider go dan? >> i would make one point about trying to short strength. it's really hard. it's not working too hard. >> working you think will keep working? >> it could show relative strength until it doesn't. i would almost want to jump on this when it starts to show relative weakness, relative to other things that actually maybe already come off of it. to me i am definitely looking for the first opportunity to sell the 220s, 200s. >> send us a tweet. scott has a way to profit from the surge in the vix here. in addition to scott, you'll find trader blogs and educational materials. here's what's coming up next. why are traders suddenly obsessed with the "titanic"? because it's starting to feel a lot like 1997. we'll tell you what that means for your money. plus, why is steve wynn so
angry at "options action"? >> if we're going to have this conversation we'll do it intelligently. >> let's not and say we did, steve. but we will tell you how to profit from the stock when "options action" returns. >> announcer: "options action" is sponsored by think or swim by t.d. ameritrade. al time. ♪ the shell brought him great fame. ♪ but then, one day, he noticed that everybody could have a magic seashell. [ indistinct talking ] [ male announcer ] right there in their trading platform. ♪ [ indistinct talking continues ] [ male announcer ] so the magic shell went back to being a...shell. get live squawks right in your trading platform with think or swim from td ameritrade.
♪ [ indistinct shouting ] [ male announcer ] time and sales data. split-second stats. [ indistinct shouting ] ♪ it's so close to the options floor... [ indistinct shouting, bell dinging ] ...you'll bust your brain box. ♪ all on thinkorswim from td ameritrade. ♪ the analogy from back in '97 when the tide broke and the late beloved mark haynes on air said,
who the hell cares about the tide bog? we found out in a matter of three days. >> that was art cashin. they aren't that far-fetched so if that is the case, where should you put your money right now? carter worth, let's get back to you. is this in fact a fair comparison? >> it has some of an analogue but let's try to figure out together. it was in '98 when things got bad when the russian ruble got bad but it started in asia. i want to look at a four-year chart. this is '95, '96, '97, '98. this is the s&p. in june to september, october, of '98 the s&p dropped 22%. that was associated with first in asia, then in russia and long-term capital. what happens is hedge funds exposed to these things capitulate and go bottoms up. take a look at utilities in the same period. utilities, it's not just staples or health care.
specifically utilities. in the exact same period utilities were up five. so you've got market down 22% in the june/october period of 1998 and utilities act quite well. we have a similar thing going on here right now. take a look. just of late, a little bit of weakness as we know in the s&p and a simultaneous period of strength in utilities. a bit of convergence over the last two years. now, here's what we're thinking. we've come out of the well defined wedge just ever so slightly. we've come out onto the upside. and a breakout like that is a fairly powerful thing and implies higher prices. we think the xlu, etf is higher. take a look at this long-term chart to put it in perspective. again, ever so slightly we've broken above this well defined wedge that's a very powerful setup. >> all right, carter. he makes a good case but let's talk first about this comparison.
we're all around at various ages. >> you were in high school. >> but do you think this is valid, mike? >> i think there's some validity to it. let's think about what it is. you could have a potentially deflationary situation is one of the concerns as some people have suggested. in that situation then you suddenly would say you want to go -- there might be a plight to safety. bonds is not a price where you want to do that. this is kind of an inflation adjusted bond proxy so it makes it a somewhat compelling area in that respect. valuations is not insane. i think you can definitely use this as a hedge being mechanism. >> let me make one more comparison. we have a couple of charts here going back to 1997 because we're talking about '97. look at the vix versus the s&p and how it's trading in crises. look that right up there. you know, we see when it crosses paths here. we see the fact that the one on the bottom is the volatility index. you know, we are really near these 15-year lows right now. we're still not pricing a whole heck of a lot. when you look at that right there, that is, you know, the
ten-year chart. we've reached some pretty extreme levels. it would make sense to have a reversion. what does a reversion mean? it means increased volatility and equity prices come in a little bit. >> i think it's interesting as we see these things unfold a second or third time, we're a little more prepared for them. i was in the bond omgs option pit on trade in that whole series of events. i tell you, when some of these things come unwound, people will do anything, so i understand what mike is saying here. >> let's get to your trade, mike. xlu. >> i'm simply going to buy the june 40 calls. it costs about 75 cents. take advantage of the fact that utilities don't move around that much. this is a basket of them, so the option's going to be a little cheaper. they could have been cheaper than this. if they do get cheaper, i would want to buy more of them. >> it's not only xlu. look at the things that were working well when yields were low. it's trading at 12-month lows here. it has a 5 1/2 year low here. there's some other names out
there. you know what else did well today? homebuilders, high yielders. there's a lot of things you could go if you want to reach for yield. >> coming up next, in the last week wynn has rallied 12%. so why is steve wynn so angry. we'll tell you when we come back. >> announcer: "options action" is sponsored by think or swim by t.d. ameritrade. ♪ [ indistinct shouting ] [ male announcer ] time and sales data. split-second stats. [ indistinct shouting ] ♪ it's so close to the options floor... [ indistinct shouting, bell dinging ] ...you'll bust your brain box. ♪ all on thinkorswim from td ameritrade. ♪
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time for "i want more cash." we take a look at previous winners and see if there's a way to get even more money. on january 3rd dan said to get short on the emerging markets. take a listen. >> it's merging markets that makes me nervous. when the eem was 30 today you could have bought the february 40 put for $1.15. >> we all know what happened, dan, what are you doing now? >> listen, we made the case that implied volatility was really low. right now, you know, at the time we kind of outlining 40 to 36 as the range. it's at 38. i would sell a 36 put. in march about 65 cents. you could have a $4 wide put spread on for 50 cents and i think that should be nice protection between now and march expiration.
>> two weeks later he bet against wynn resorts. here's what he said. >> this is trading 30 times. that's troublesome to me. i'm going go ahead and buy a put. >> this trade was really working until about three hours ago, so, mike, how do you manage this? >> this is an interesting one and maybe a good reason to follow us on twitter. we were looking specifically to try to spread this trade and in fact a week later that's what we did. we tweeted about it. it's a situation where it's still -- all of the things i said about the stock i still feel fairly strongly about it. so if you did not spread it, i would still stick with this trade and look for an opportunity do so. >> and finally in late december scott got bearish on consumer discretionary stocks. >> we don't have to get too cute here. carter is bearish, options are cheap. we want to buy a put. in xly earlier today against stock at $66.25 we could buy the february 66 strike put for $1.20. >> now the hottest trade of last year has been anything but this year, so scott what are you doing? >> well, options in xly are not particularly cheap. like dan, i want to spread out
of this. on the close you could have sold february 63 strike put for a buck. you'd end up paying 20 cents for a spread worth as much as $3. >> i want to consult carter on this one since he got us in it. carter, what do you say? >> there's no indication that selling consumer is finish. we would stay short on the xly. in terms of wynn, the stock has rallied right back to the level from which it ran last time. which we would say good earnings but only return it to what it was. those earnings were largely priced. we would say stay short. >> what do you think about the consumer at this point? we've got to a couple of notable data points? >> i thought they were very stock specific. >> amazon was all amazon. walmart was all walmart. >> no. it's funny. for the last couple of months we had a lot of one off situations, people were blaming weather, this and that, security breaches. i think when you put it all together, it doesn't make for a good environment. we're going the see how strong this consumer will be for the next couple of months. >> think amazon is interesting. i guess now the company can't
lose enough money to prop up the stock price, but i do think amazon is stock specific. >> mike? >> i think that chipotle was certainly a single stock story and its evaluation is ridiculous but walmart and amazon probably bode ill over what we're going to see in the next couple of weeks. coming up next, the final call from the options pits. "options action" is sponsored by think or swim by t.d. ameritrade. who found a magic seashell. it told him what was happening on the trading floor in real time. ♪ the shell brought him great fame. ♪ but then, one day, he noticed that everybody could have a magic seashell. [ indistinct talking ] [ male announcer ] right there in their trading platform. ♪ [ indistinct talking continues ] [ male announcer ] so the magic shell went back to being a...shell. get live squawks right in your trading platform with think or swim from td ameritrade.
[ male announcer ] time and sales data. split-second stats. [ indistinct shouting ] ♪ it's so close to the options floor... [ indistinct shouting, bell dinging ] ...you'll bust your brain box. ♪ all on thinkorswim from td ameritrade. ♪ take a look at that cutie. you're looking at the next great television star. that is ellie taft nation. if she looks familiar that's because she is the 8-year-old daughter of our very own dan nate that will. curiously despite her young age she's only slightly less mature than her father. welcome ely to "options action." ellie, i know you follow the stock market a bit. what is your favorite stock? >> i'm with carl the apple. >> she's talking about carl icahn. amazing. time now for the final call.
scott? how to short volatility. any dope can sell naked options and be short volatility but this week's extra we talk about the short volatility and do it while defining risk. >> we're going to go to carter. carter, what do you say? >> final trade is be defensive. if you have do something do utilities. >> dan? >> you know, in twitter i'm not saying go out and buy the stock here, but, you know, the high of the year is 75. the low is about 55. take advantage of the really high option implied volatilities and recreate a long structure with options. >> mike. >> it's very interesting. the price of options is setting up two great opportunities. one to sell them. that's the twitter trade that dan talked about, and the other is to buy them on defensive trades like xlu. actually believe it or not, there's still some opportunities to be long put in some of the places that they haven't stopped dropped like wynn, like cmg. >> looks like our time has expired. check out the website.
check out our daily segment. we'll see you back here next friday at 5:30 eastern time. thank you, ely, for joining us. "mad money" is up next after this. >> announcer: the following is paid presentation for focus t25, brought to you by beachbody. >> [ echoing ] it's about time. the number-one people have for not working out is they don't have time. >> i have four kids. >> i work 60, 70 hours a week. >> i don't want to work out for no hour. are you kidding me? i don't have the time. >> announcer: no time to work out? no problem. introducing focus t25, the breakthrough in-home fitness program guaranteed over an hour's results in only 25 minutes. t25 was created by a guyho